Economists chart lower inflation forecasts

MANILA, Philippines - Private bank economists further lowered their inflation forecasts over the next three years amid heightened risks from the severe and prolonged El Niño weather phenomenon and uncertainties brought about by the impending interest rate liftoff in the US.

Results of the survey of private sector economists conducted by the Bangko Sentral ng Pilipinas (BSP) showed a lower mean inflation forecast of 1.7 percent for this year instead of the 2.3 percent average in the June survey and 2.7 percent in the March survey.

The survey also showed a lower mean inflation forecast of 2.7 percent instead of 3.1 percent for 2016 and 2.9 percent instead of three percent for 2017.

“The analysts attributed their lower inflation expectations mainly to lower international food and oil prices. These are likely to outweigh the upside risks brought by the El Niño phenomenon, the possible Federal rate hike, increased expenditure from the upcoming election, holiday spending, and the normalization of oil prices,” the BSP said.

The BSP has set an inflation target of two percent to four percent for 2015 and 2016.

The September survey showed 62.8 percent of the respondents expect inflation averaging between one and 1.99 percent, while 19.8 percent expects consumer prices to settle within the two to four percent range.

Inflation eased to a new record low of 0.4 percent in September from 0.6 percent in August amid stable food prices and cheaper utility rates. This brought the nine-month average to 1.6 percent this year.

Zeno Ronald Abenoja, director of the BSP’s Department of Economic Research, said the continued deceleration in headline inflation was driven mainly by the slower increases in most food items as a result of adequate domestic supply.

Abenoja explained non-food inflation likewise decreased due to the decline in power rates and in the prices of domestic petroleum products.

According to him, the country’s gross domestic product (GDP) growth picked up to 5.6 percent in the second quarter from the revised five percent in the first quarter driven mainly by accelerated consumer and government spending as well as increased investments on the demand side and by the resilient service growth on the production side.

He added domestic financial market conditions remain sound as ample liquidity and robust credit growth continued to support the favorable domestic growth outlook.

“Nevertheless, domestic economic activity continues to expand at a solid pace, as credit and liquidity growth remains in step with the overall requirements of the economy,” he said.

Abenoja said monetary authorities are monitoring external headwinds from the slowdown in the Chinese economy and from the uncertainty surrounding the US interest rate lift-off.

“Volatility in the global financial market resulting from slower growth in China and the expected normalization of monetary policy in the US could be an important consideration for the inflation outlook in the quarters ahead to the extent that it influences inflation expectations and market sentiment on the domestic front,” he added.

He explained the current monetary policy settings are appropriate as inflation is likely to settle slightly below the two percent to four percent target range this year before rising gradually toward the midpoint of the target range in 2016 and 2017.

The BSP has revised its inflation forecast to 1.6 percent this year and to 2.6 percent next year.

According to him, monetary authorities are still assessing the impact of the damage cause by Typhoon Lando on the agriculture sector on inflation.

“The inflation profile has not yet taken into account the impact of the recent typhoon Lando,” he said.